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The Economics of Urban Growth Dr. Adnan A. Alshiha Determinants of the Growth process • The distribution of resources. • Relative mode of production. • Level of demand. • The efficiency of price system. The Principles of Location Analysis • People want to locate where they can maximize their satisfaction. • Producers desire to locate where their profit are expected to be maximize. • Producers motives are more important than worker motives. Why? Because: Businessman has more to lose. More change in the pattern that determine firm preferences than the pattern that determine consumers preferences. The Principles of Location Analysis • We begin with producers decision. • Production process is consist of three stages: Procurement. Processing. Distribution. • Procurement and Distribution have a common determinant: transportation cost Transfer Cost and Firm Location • The reduction of transfer costs is a strong incentive to concentrate the three stages of production at a single point in space. • Transfer cost must be consider in relation to distance. • For given modes of transportation, transfer cost per unit of product increase with distance. • But at longer distance , the increase begin to tail off. • In other word, as distance increases , the marginal cost of shipping a good anther kilometer decline. Transfer Cost –Distance Relationship Truck Transfer cost Rail Barge Distance How Do Transfer Cost Affect Individual Producer? • Consider a producer (bakery) in single linear market, where neither the volume of business nor his processing cost varies with his location. • The bakery hires a boy for deliveries and the boy can carry only one customer’s order at a time. • Where the firm locate to minimize the boy trips? • The mean or Average distance? • The mode? Single Materials and Market site Location Problem • If the marginal procurement cost exceeds the marginal distribution costs, it will pay to locate at the material site. • When firm’s market are cities and the marginal procurement cost relatively low, we would expect firms to locate in cities Single Materials and Market site Location Problem Material Site Distance Market Site Single Materials and Market site with Terminal Cost and Transfer Economies Total Cost Distance Single Materials and Market site with Terminal Cost and Transfer Economies • It will pay producer to locate at the material site or the market site. For at these points the firm could save terminal cost on materials or the final product. • In general , producers will be oriented toward markets when the product: • 1- is weight – gaining manufacturing, as beer. • 2- has higher transfer costs on distribution , than on procurement • 3- is perishable, as are ice , baked goods, and fresh agricultural product. The Location Decision of Persons • Firms motives are more important in determining the location of economic activities than person’s motive. • It follows, that people will tend to be “pulled” to the center or areas of rising economic activity. • People will be “pushed” away from areas having low levels of income per capita or wage rate and high unemployment level. • “pull” and “push” factors diminish as distance between the two cities increases (people have lee information). • These ideas can be expressed in simple gravity model. Models of Urban Growth • A short – Run Model Income Determination. • Urban Economic Base Models. • Central – Place Models. • Input-Output Models. A short – Run Model Income Determination • The Keynesian multiplier: reciprocal of the quantity (1 minus the marginal propensity to consume). • When any given change in spending is multiplied by the multiplier , one get the final change in income. • Example: • If people spend ¾ of any given change in their income, the multiplier will have a value of • 1/(1-3/4) A short – Run Model Income Determination • Aggregate income or production (Y) =the sum of consumption (C), Investment (I), Government expenditure (G), and net export (X). Urban Economic Base Models • The economy of the city may be divided into two sectors: 1- The exporting or basic sectors. 2- The service or non-basic sector. • The basic sector is the key to growth Basic and non-basic • 1- The exporting or basic sectors: • bring income into the city by selling goods and services outside the city • 2- The service or non-basic sector whose output sold within the city Economic-Base Studies • Base studies were done by estimating the amount of employment that was used to produce goods and services sold outside the city. Methods of estimating “export employment” • The location quotient • The minimum-requirement The location quotient • For any sector is found by comparing that sector’s share of the total employment in the city with the share of employment for that sector in benchmark area. • Example: • If the chemical sector in a given city has 20% of the city’s total employment • While chemical share of total employment in Saudi Arabia is only 10% • This method allocate ½ of the chemicals employment in the city to export. The minimum-requirement • Involve arraying the Percentage of total employment of industry for number of cities. • Cities are grouped according to population size class • The percentages are arrayed from smallest to largest. • The lowest percentage is considered that share of employment rquired to service local needs. • The remaining employment is said to be basic. Change S S” S W a g e D” D Employment Basic Employment Non - Basic Central – Place Models • Explain the size , number, and distribution of towns across space. • The word central comes from the relatively efficient location of the city with respect to its hinterland. Degree of Centrality • Is measured by its order. • High-order cities offer high-order goods, have many establishment , large population, and a vast hinterland. • High-order good: are shopping goods the consumer would travel a sizable distance to purchase (mink coats, diamond, professional sport). • Lower-order places: provide lower-order good to small surrounding areas. • Lower-order goods are primary necessities, such as groceries and gasoline, which require frequent purchase with minimal travel Origin and Size of Central Places • Are explained by two concepts: • Threshold: is the minimum level of demand required to support the production of good by (at least) a single establishment. • Once production is originated for any good , how far does the market extend? This is determined by the range. • The range: delineates the zone around any central place from which a person travel to obtain the good. • Since the price of any good rises with distance the range is limited by the relevant transportation cost. • Technically, the boundary of the range is that point in space where a person is indifferent in choosing between two central places that offer the same good. Input-Output Models • Describe the interrelationships among industries and final users of products for any economy. • Industries are defined on product basis, each industry produce a single homogeneous product. • Final users (final demand): consumer, government, investors and export. • The model shows how the output of each industry is distributed to all of its users. • The model also show the purchases of inputs from all other industries or sectors. The Input-Output Table Sector 1 sector2 Final demand Total Gross output SR.20 SR.40 SR.40 SR.100 sector2 30 80 90 200 Value added 50 80 100 200 Sale to Purchase from Sector 1 TGO 300 Direct coefficient per Riyal of Output Sector 1 Sector 2 Sector 1 0.2 0.2 Sector 2 0.3 0.4 Value added 0.5 0.4 Direct and indirect requirements per Rial of delivery of Final Demand Sector 1 Sector 2 Sector 1 1.43 0.48 Sector 2 0.71 1.90 Impact Multiplier 2.14 2.38 Distributional Impact of Urban Growth • How income is distributed? • The importance of This issue to contemporary urban poverty and other problem is selfevidence • In general, the distribution of income is determined by how things are produced and the taste of consumers. Is urban Growth Immutable? • The urban size ratchet: the rate growth never fall bellow zero. • This is a reasonable explanation why big cities continue to grow Is There an Optimum Sized City? • Demand and comparative advantage act as limits on the size of cities. • The problems of pollution, congestion, and interjurisdictional spillover could be classified as possible symptoms of excessive urban size. • Optimal city size is reached when the additional social benefits of adding anther person to the city are exactly equal to the additional social cost. • That is , when the marginal social utility of adding anther person is zero